Fraud Reported in Citigroup Unit in Mexico

On Friday, Citigroup Inc announced it had discovered in a subsidiary in Mexico a number of fraudulent loans and that employees there might have been involved with the crime.

By writing down each of the loans, it will lower the 2013 bank net income by nearly $235 million, which brings the reported total net income down to $13.67 billion, said the bank in a formal statement.

Citigroup has said it believes the episode has been an isolated incident. The fraudulent loans were made to an oil services company in Mexico named Oceanografia SA de CV. The company is a contractor for the state-owned Pemex oil company. In Mexico, Oceanografia is currently amidst a corruption probe.

Oceanografia borrowed monies from the Mexican unit of Citigroup named Banco Nacional de Mexico, more popularly referred to as Banamex. The expected payments that Oceanografia would receive from Pemex were used for collateral.

Banamex was able to discover during a recent review of documents that it appeared that Oceanografia had falsified invoices sent to Pemex that had been collateral for the loans, said Michael Corbat the CEO at Citigroup in a memo to all employees.

The financial institute wrote down over $400 million in loans that were backed by the invoices that turned out to be bogus.

On February 11, the government suspended Oceanografia from receiving state contracts for the next 21 months. Oceanografia said over 97% of its total revenue is generated from Pemex.

Corbat, in the prepared statement, said that Banamex was working with the attorney general in Mexico to start criminal action. Corbat said criminal actions could help the bank recover some damages.

In a separate memo to all employees, Corbat said that an employee at Banamex processed the invoices that were fraudulent and that it is still unclear the total number of people involved with the current fraud.

Corbat promised that accountability would take place for those people who perpetrated the crime. As well as any bank employees whom enabled it, due to lack of supervision, circumvention of bank controls or a violation of the Code of Conduct.